Cost Segregation Services: Processes and Explaining IRS

| Updated on March 27, 2024

The initial item that should come to mind about purchasing new real estate or the performance of renovations is the cost. Now is the time to ponder about differences and similarities. The method of cost segregation services runs on being a tool for strategic planning that entails identifying the personal property assets and then reclassifying them to cut down on the amount of time needed for depreciation. 

Suppose you are thinking of doing cost segregation research. In that case, you must work with certified and seasoned experts who are also familiar with the applicable regulations of the federal tax code.

If your local accountant has prior expertise working with cost segregation research procedures, they may be able to provide you with this type of support. A team of professionals, such as an attorney and an engineer, working alongside your accountant may assist in precisely classifying the aspects of the research and ensuring that they are following the regulations set out by the Internal Revenue Service (IRS). These professionals should inform you of their practices at each journey stage, providing the confidence you need to move on without worry.

Processes for Cost Segregation Services

If the straight-line technique were used to calculate depreciation, the normal depreciation time for a commercial property to be placed into operation would be 39 years. But in the other hand, if a cost segregation study is carried out, the various components of the structure will be disassembled and then sorted into the following categories:

  • Building
  • Land
  • Personal property
  • Land improvement

Those parts of the structure that will be classified as personal property or as improvements to land may be eligible for accelerated depreciation, which allows for shorter useful lifetimes. When the personal property in question is considered tangible, the useful life of the item can range from five to seven years. The amount of time that will pass before the asset is destroyed is called its “useful life.” The 15-year property classification applies to landscaping and development projects.

At this stage, it is essential to be reminded that the cost segregation services study should be supported firmly and appropriately by documentation. Due diligence is crucial. 

A tax court may be necessary if the Internal Revenue Service cannot distinguish between the components of a structure that are regarded as tangible personal property and those that are structural components of the building.

Both the collection of taxes and the administration of the revenue code fall within the purview of the Internal Revenue Service (IRS). The Internal Revenue Service (IRS) employs agents who have received specialized training to conduct audits of cost segregation studies. 

A competent auditor will request a copy of your written report on the engineering-based cost segregation. This report should include a narrative about the property, a specified cost analysis of the assets, photographs, and a methodology brief for the assumptions employed.

When you apply cost segregation services to newly purchased property, you position yourself to gain significant tax advantages. Before applying to a cost segregation study, you should discuss the possibility with your certified public accountant. To summarize, a cost segregation study has the potential to be an effective instrument for real estate investors.

It is in your best interest to speak with a certified public accountant (CPA) or a cost segregation specialist for your property to ensure that you make the most of the potential offered by this instrument.

Cost Segregation Services: Internal Revenue Service

Abraham Lincoln, who served as president then, created the Internal Revenue Service (IRS) and enacted an income tax in 1862 to raise money to pay for the Civil War. Every year, the Internal Revenue Service (IRS) will randomly choose some individual tax returns to investigate further as part of its enforcement efforts. The department reviewed 509,917 tax returns during the fiscal year 2020. 

This statistic represents 0.63 percent of individual income tax returns and 1.0 percent of corporate tax returns. The IRS conducted around 72.6 percent of its audits through the mail, while the remaining 27.4 percent were out in the field.

After reaching its highest point in 2010, the number of audits steadily declined yearly. It is anticipated that there would be an even smaller number of tax audits due to the reduced budget allocated for tax enforcement of around 30 percent between 2010 and 2020. There are many different reasons why the IRS may audit a taxpayer’s return, but some factors may raise the likelihood of an inspection. The most important of these is an increase in income. 

The percentage of individual tax returns that were subject to audit in the year 2020 was 0.63 percent. On the other hand, the rate was 9.8 percent for those with more than $10 million in earnings.

Owning and operating your own company exposes you to a higher level of risk. Those individuals who made $200,000 to $1 million in 2018 and did not submit Schedule C, the form for the self-employed, had a 0.6 percent chance of being audited. Still, those individuals who filed Schedule C had a 1.4 percent chance of being audited, which is virtually double the risk.

Other red flags that indicate the need for an audit include:

  • Failing to declare the correct amount of income.
  • Trying to claim a higher-than-normal amount of deductions (especially ones related to business).
  • Making charitable donations that are disproportionately large in comparison to income.
  • Claiming losses on rental real estate.

No one element decides who will or will not be subject to an audit by the IRS each year. It is highly recommended that you file your taxes digitally, as was the case with 94.3 percent of taxpayers in 2020. You still have the option to send in a paper return via the mail, but doing so will cause a delay in the processing of any refunds.

John M. Flood

John is a crypto enthusiast, Fintech writer, and stock trader. His writings provide guides to perform your best in the crypto world and stock planet. He is a B-Tech graduate from Stanford University and also holds a certification in creative writing. John also has 5 years of experience in exploring and understanding better about the FinTech industry. Over time, he gained experience and expertise by implementing his customized strategies to play in the crypto market.

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